Note: This report contains substantially new material. Subsequent reports will have changes highlighted
Reason for Report: 4Q17 Earnings with New Reports
Prev. Ed.: Jan 15: 3Q17 Earnings Update (share price and broker material considered till Dec 31, 2017).
Brokers’ Recommendations: Positive: 40.0% (2); Neutral: 20.0% (1); Negative: 20.0% (1); Prev. Ed. 3:2: 1
Brokers’ Target Price: $94.37 (↑$4.57 from the last edition; 3firms) Brokers’ Avg. Expected Return: 16.4%
*Note: Though dated Apr 15, share price and brokers’ material are as of Apr 5, 2018.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Note: All reference to growth rates is at constant exchange rates (CER).
Portfolio Manager Executive Summary
Novartis AG is a leading global healthcare company.The company’s main areas of operation are branded and generic prescription drugs. In the branded drugs category, the company holds a strong position in cardiovascular and oncology. Novartis also owns several consumer health-related businesses.Following the portfolio reorganization in 2014, Novartis operates under three segments: Innovative Medicines (Pharmaceuticals), Alcon (Ophthalmology unit) and Sandoz (Generics).
Of the eight firms covering Novartis, 40.0% (2) were positive, 20.0% (1)were neutral and 20% (1) were negative on the stock.
Positive outlook (2/4 firms):The bullish firms believe that Novartis’ three attractive businesses – pharmaceuticals, eye care, and generics – along with a strong revenue growth profile, which is backed partly by heavy diversification and solid pipeline, bode well for the company. The firms expect growth from recently approved products to enable the company to mitigate patent losses in the near term. These firms are impressed by the company’s deep pipeline.
Neutral outlook (1/4 firms): These firms believe that Novartis is facing multiple headwinds as of now- lagging performance of Alcon despite restructuring, intensifying competition for Gleevec from Roche’s Ocrevus. In addition, Gleevec is also facing competition from generics while Afinitor and Gilenya will also lose patent protection in the United States by 2019 and 2020, respectively. The uptake of Entresto has been slow and will impact the top line. The firms prefer to be on the sidelines until they witness meaningful growth in Entresto sales as growth in Sandoz will be partially offset by the above-mentioned factors.
Negative outlook (1/4 firms):Reports not available.
Jan 15, 2018
Overview
Novartis is a healthcare company based in Basel, Switzerland. Its broad portfolio includes pharmaceutical drugs, vaccines, surgical products, ophthalmic pharmaceutical and vision care products, generics and consumer health products. After the divestment of its blood transfusion diagnostics unit in Jan 2014, the Vaccines and Diagnostics unit was renamed Vaccines. Novartis sold its Vaccines business (excluding flu) to Glaxo for $7.1 billion along with royalties earlier in 2015.Additionally, Novartisdivested its influenza vaccines business to CSL Limited for $275 million in Jul 2015. Currently, the company is focused on its three leading businesses – pharmaceuticals, generics and eye care.
Novartis has collaborations with several companies. Further, the company gained full ownership of Alcon, which has created a new growth platform for Novartis in the fast growing eye-care sector. The company’s website address is
The firms have identified the following factors for evaluating the investment merits of Novartis:
Key Positive Arguments / Key Negative ArgumentsThe company has a wide portfolio of products and does not depend on any single product for growth. Moreover, the portfolio realignment plans with the divestiture of the Animal Health and Vaccine divisions and acquisition of Glaxo’s oncology business will allow Novartis to focus on its core businesses. / A number of key drugs at Novartis are already facing patent expirations and more will lose exclusivity in the next few years. Novartis’ blockbuster hypertension drug, Diovan, saw dwindling sales due to generic competition in the United States. (Diovan monotherapy generic entry in Jul 2014), many EU countries and Japan (generic entry in Jun 2014). Gleevec also lost patent protection. Generic competition is expected to adversely impact sales in 2017 as well. The newly launched products may not generate sufficient revenues to bridge the gap caused by generic erosion.
Novartis has made strong progress on innovation with several new approvals – Jakavi received European approval for polycythemia vera (PV), Farydak received FDA approval for multiple myeloma and Jadenu (oral formulation of Exjade) received FDA approval to simplify daily treatment for patients with chronic iron overload. Additionally, new approvals for Sandoz – Zarxio and Glatopa – strengthened the biosimilars business. Cosentyx, Entresto and the oncology assets from Glaxo are expected to drive growth. / 2017 is also expected to be challenging year for the company. Moreover, some countries like Venezuela are experiencing high inflation rates leading to further devaluations of their currencies resulting in unfavorable movements in foreign currency rates. Pricing pressure continues to persist and is expected to increase in 2017.
The FDA approval of breakthrough gene transfer treatment, Kymriah suspension for the treatment of patients up to 25 years of age with B-cell precursor acute lymphoblastic leukemia (ALL) that is refractory or in second or later relapse is a significant boost. Kymriah, formerly CTL019, is the first chimeric antigen receptor T cell (CAR-T) therapy approved. The approval is a major boost for Novartis given the potential in the CAR T therapy space.
Note:The company’s financial year coincides with the calendar year.
Jan 15, 2018
Long-Term Growth
Novartis is continuously making progress with new product approvals, which demonstrates its non-dependence on any single product for future growth.In addition to investments in innovation, Novartis is undertaking group-wide productivity initiatives, which are expected to improve efficiency in manufacturing, sales, marketing and procurement.
Meanwhile, Novartis has realigned its portfolio. In order to focus on its core businesses of pharmaceuticals, eye care and generics, the company divested its Animal Health Division for $5.4 billion to Eli Lilly in Jan 2015. The company also sold its Vaccines business (excluding flu) to Glaxo for $7.1 billionalong with royalties in exchange of the latter’s oncology products for $14.5 billion plus up to $1.5 billion as milestone payments. The assets have been integrated into the company’s portfolio. This will improve the financial profile of the company and position Novartis for healthcare industry challenges in the future. Additionally, Novartis divested its influenza vaccines business to CSL Limited for $275 million in Jul 2015.Glaxo and Novartis have decided to form a joint venture, thereby combining their consumer divisions (Novartis OTC and Requires Entitlement K Consumer Healthcare) to form a largerconsumer health care business. A number of product approvals including those of Entresto, Cosentyx (moderate-to-severe plaque psoriasis), Jakavi (PV), Jadenu (chronic iron overload due to blood transfusions) and Glatopa (relapsing forms of multiple sclerosis) are expected to boost the top-line.
Meanwhile, Sandoz, the generic arm of Novartis, stands to benefit from the wave of patent expiry as demand for cheap generic alternatives of expensive drugs is increasing. Given the uncertain economic outlook, various government agencies as well as privately managed care organizations are taking initiatives to promote generics in place of costlier branded treatments. These factors, together with an aging population and a corresponding increase in health care costs should lead to continued expansion of the generics marketplace. Sandoz, which is a strong player in the biosimilar market with five marketed biosimilars (Omnitrope, a human growth hormone; Binocrit, an erythropoiesis-stimulating agent used to treat anemia; and filgrastim for neutropenia under the brand names Zarzio outside the United States and Zarxio in the United States.). The company plans to launch five major oncology and immunology biosimilars between 2017 and 2020. This includes a biosimilar version of Rituxan (rituximab), which was approved by the European Commission in June 2017 (marketed as Rixathon). Recently, the FDA accepted its Biologics License Application (BLA) for a proposed biosimilar version of Rituxan. In August 2016, Sandoz’s Erelzi, a biosimilar version of Amgen blockbuster drug Enbrel gained approval in the United States for five indications. Erelzi was also approved by the European Commission in 2017. In May 2017, the European Medicines Agency also accepted the company’s Marketing Authorization Applications for biosimilar versions of Humira (adalimumab) and Remicade (infliximab) for review.
However, Alcon was facing challenges due to competition. Consequently, Novartis has decided to move ophthalmic pharmaceuticals business to its core pharmaceutical division. Thus, the Alcon division will focus only on the surgical and the vision care businesses. The company is facing strong generic threat which continues to erode the company’s revenues. Novartis’ blockbuster hypertension drug, Diovan, lost patent protection in the United States and the EU. Femara and Zometa have also lost patent protection. Moreover, Gleevec is also facing competition. Headwinds for 2017 include genericization of Gleevec as well as a significantly higher launch investment for Cosentyx and Entresto, along with unfavorable currency movements.
Jan 15, 2018
Target Price/Valuation
Rating DistributionPositive / 40.0%↓
Neutral / 20.0%↓
Negative / 20.0%↑
Avg. Target Price / $94.37↑
High / $98.00↑
Low / $92.00↓
No. of Analysts with Target price/Total / 3/4
Recent Events
Novartis Q4 Earnings & Sales Top on Cosentyx, Entresto– Jan 24
Novartisreported encouraging results for fourth-quarter 2017 wherein both earnings and revenues beat estimates driven by strong performance of Cosentyx and Entresto.
Fourth-quarter 2017 core earnings of $1.21 per share beat the Zacks Consensus Estimate of $1.16 and were up from $1.12 recorded in the year-ago quarter. Revenues increased 5% to $12.9 billion as volume growth driven by Cosentyx and Entresto was partially offset by the negative impact of generic competition and pricing. Revenues also beat the Zacks Consensus Estimate of $12.6 billion.
All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.
Quarter in Detail
Novartis operates under three segments: Innovative Medicines (Pharmaceuticals), Alcon (Ophthalmology unit) and Sandoz (Generics).
The Innovative Medicines division recorded sales of $8.8 billion, up 4%. Generic competition impacted sales at the segment, primarily due to the entry of generics for Gleevec in the United States and Europe. Pricing too impacted sales. Nevertheless, growth products — Cosentyx, Entresto, Promacta/Revolade, Jakavi, Tafinlar + Mekinist and Gilenya boosted sales.
Psoriasis Cosentyx achieved multi-blockbuster drug status in 2017 on the back of strong growth in its three approved indications while Entresto’s sales benefited from continued access improvements and expansion of sales force in the United States. Cosentyx generated sales of $2.1 billion in 2017. Entresto sales came in at $507 million in 2017. Oncology franchise (excluding Gleevec) grew 13%.
Sales at the Sandoz division were $2.6 billion, down 4% as volume growth was offset by price erosion in the Unites States. Sales in the United States declined 17% due to pricing pressure. Biopharmaceuticals sales grew 6% mainly driven by Zarxio in the United States and launches of Rixathon, the biosimilar version of Rituxan (rituximab) and Erelzi, the biosimilar of Amgen, Inc.’s Enbrel in EU.
Sales at the Alcon division were $1.6 billion, up 6%. Surgical sales increased 9% driven by broad recovery across most market segments, including strong growth from vitreoretinal products. Vision Care sales were up 2% fueled by the continued double-digit growth of Dailies Total1.
Earlier, Novartis announced that it is mulling over strategic options for its lagging eye-care unit Alcon which includes retaining the business, or a separation via capital market transactions such as a spin-off or an initial public offering. The company updated its strategic plan and announced that it has the potential to grow sales at or above market while delivering profitability in line with the industry. The company also made significant progress on developing a potential capital markets solution, including financial carve-outs, tax and legal entity structuring, and identifying listing and incorporation locations. A final decision will be taken depending on Alcon’s sales performance which is not likely to happen before the first half of 2019.
Meanwhile, Novartis has moved the Ophthalmic OTC products to the Alcon Division, effective Jan 1, 2018, to allow the Innovative Medicines Division to focus on pharmaceutical pipeline.
2017 Results
Sales came in at $49.1 billion, up 2% from 2016 and beat the Zacks Consensus Estimate of $48.9 billion. Earnings per share came in at $4.86 beating the Zacks Consensus Estimate of $4.79 and up from $4.75 per share in 2016.
2018 Outlook
Novartis expects net sales in 2018 to grow low to mid-single digit. Innovative Medicines is projected to grow in mid-single digit. Revenues from Sandoz is expected to be broadly in line or decline slightly. Alcon sales are estimated to grow in low to mid-single digits.
Pipeline Update
Novartis’ pipeline candidates’ progress has been encouraging. 2017 was a good year for Novartis with 16 major approvals. The oncology portfolio continues to gain traction. In a significant boost, the FDA approved its breakthrough gene transfer treatment, Kymriah suspension for the treatment of patients up to 25 years of age with B-cell precursor acute lymphoblastic leukemia that is refractory or in second or later relapse. Kymriah has been launched in the United States. Novartis is seeking to expand Kymriah’s label.
Novartis’ supplemental Biologics License Application for Kymriah suspension for intravenous infusion, for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma who are ineligible for or relapse after autologous stem cell transplant has been accepted by the FDA for Priority Review.
Breast cancer drug Kisqali was approved in Europe as a first-line option for HR+/HER2- advanced or metastatic breast cancer in combination with any aromatase inhibitor. The drug is already approved in the United States. The company also received approval of Rydapt in Europe for the treatment of newly diagnosed FLT3-mutated acute myeloid leukemia and three types of systemic mastocytosis.
Sandoz continues to progress with its biosimilars pipeline. The biosimilar of Roche’s Rituxan, Rixanthon, and Amgen’s Erelzi has been launched in the EU. The proposed biosimilar version of AbbVie. Inc.’s Humira (adalimumab) has also been accepted for review by the FDA. The biosimilar version of Humira is already review in the EU.
Tasignawas approved in Europe for the treatment of pediatric patients with newly diagnosed Philadelphia chromosome-positive chronic myeloid leukemia in the chronic phase (Ph+ CML-CP) and pediatric patients with Ph+ CML-CP with resistance or intolerance to prior therapy including imatinib.
Revenue
The The company reported net sales of $12.9 billion in 4Q17, up 2% y/y as volume growth (7%) was offset by the impact of generics (-3%) and pricing (-2%). The Zacks Digest average 4Q17 revenues were $12.6 billion.
2018 Outlook:Novartis expects net sales in 2018 to grow low to mid-single digit. Innovative Medicines is projected to grow in mid-single digit. Revenues from Sandoz is expected to be broadly in line or dip marginally. Alcon sales are estimated to grow in low to mid-single digits. The impact of generic competition on sales is expected to be approximately $2.5 billion in 2018
Revenue($ in
million) / 4Q16A / 2016A / 1Q17A / 2Q17A / 3Q17A / 4Q17A / 2017A / 2018E / 2019E
Total
Revenue / $12,556.0 / $49,386.0 / $11,785.0 / $12,494.0 / $12,691.9 / $13,164.1 / $50,135.1
Digest
High / $12,556.0 / $49,386.0 / $11,785.0 / $12,494.0 / $12,692.0 / $13,164.5 / $50,135.3
Digest
Low / $12,556.0 / $49,385.9 / $11,784.6 / $12,494.0 / $12,691.5 / $13,163.7 / $50,135.0
Specific Products
The company operates in three divisions: Innovative Medicines, Alcon, Sandoz (generic business).
INNOVATIVE MEDICINES (formerly named the Pharmaceuticals Division)
The Innovative Medicines Division (formerly named the Pharmaceuticals Division) is comprised of two business units (BUs): Novartis Pharmaceuticals and Novartis Oncology. Results from the InnovativeMedicines Division include the Ophthalmic Pharmaceuticals products transferred in from the Alcon segment and exclude the selected mature products transferred out to Sandoz.
Novartis’ Pharmaceuticals division researches, develops, manufactures, distributes, and sells patented prescription medicines under three franchises: Oncology Franchise, Neuroscience, Retina, Immunology & Dermatology, Respiratory, Cardio-metabolic, and Established medicines.
Sales:Sales in the Innovative Medicines division were up 6% y/y to $8.8 billion in 4Q17 owing to generic competition for Gleevec and pricing issues.
Novartis Oncology: Sales came in at $3.2 billion in 4Q17, down 1% due to a decline in Gleevec sales.
Oncology
Gleevec/Glivec (imatinib mesylate)
Indication: Philadelphia chromosome-positive chronic myeloid leukemia (Ph+CML), metastatic, unresectable and adjuvant (post-surgery) treatment of gastrointestinal stromal tumors (GIST),adjuvant treatment of adult patients following resection of Kit (CD117) positive GIST, Ph+ ALL in combination with chemotherapy. Gleevec is also approved in the U.S. and the EU for pediatric patients with newly-diagnosed Ph+ ALL in combination with chemotherapy.
Product Life Cycle Position: Marketed (as Gleevec in the U.S. and as Glivec elsewhere)
Sales: Gleevec sales in 4Q17 were $448 million, down 43% y/y due to the entry of generics in the United States on Feb 1, 2016. The Zacks Digest average 4Q17Gleevec revenues were in line with the company’s report.
Competitors:Bristol-Myers’ Sprycel
Patent/Generics: The basic compound patent on Gleevec expired in Jul 2015 in the U.S., in 2016 in major EU countries and in 2014 in Japan. Novartis settled its litigation with a subsidiary of Sun Pharmaceutical Industries Ltd. relating to patents covering the use of certain polymorphic forms of Gleevec, which expire in 2019 (including pediatric exclusivity). Consequently, Novartis granted Sun Pharma the permission to market a generic version of Gleevec in the U.S.starting Feb 1, 2016.